Hartford — The proposed Quechee Highlands project, which would be one of the largest mixed-use developments in Hartford history, was dealt a significant setback yesterday when state regulators denied it an Act 250 permit, citing concerns over increased traffic on Route 4 and developers’ failure to follow the regional plan for the area.

In a unanimous decision, the District 3 Environmental Commission refused to issue the key permit, which would have allowed construction to begin on the 10-building, mixed-use development on 12.5 acres near the Quechee interchange along Interstate 89.

The project would significantly increase traffic along already congested stretches of Route 4, the commission ruled, and runs afoul regional criteria that encourage projects to be concentrated in existing development centers, and discourage them from being built near interstate exits.

“The traffic situation is already unreasonably congested and unsafe and has been noted for many years,” the commission wrote in a 35-page ruling. “The Commission concludes that this project will cause unreasonable congestion or unsafe conditions with respect to transportation.”

The project, which has divided Hartford’s planners and regional planners, is far from dead: Project developer Scott Milne can ask the commission to reconsider its decision within 15 days, or he could submit new plans to attempt to address the commission’s concerns within six months. Or, Milne could go over the commissioners’ heads and appeal its decision to the Vermont Environmental Court.

Milne, who also runs a Lebanon-based travel agency, said he was disappointed with the decision.

“I remain optimistic, in spite of this set-back, that we will build Quechee Highlands,” Milne said in a statement. “I expect it will look very much like what we have proposed — a place for the new businesses and job creators that America sorely needs. ... Working with the Town of Hartford, and particularly the people on their Planning Commission, has inspired confidence that free enterprise and entrepreneurism can comfortably co-exist with regulation and concern for the public’s good in Vermont. Perhaps bureaucrats from Montpelier should could come down here for some learning?”

Milne could not be reached for further comment.

The project, if built, would dramatically reshape Quechee. In all, Milne proposed a three-phase development — only the first phase was brought to the commission for Act 250 review — that would include housing, retail and office space on 168 acres near Exit 1.

One analysis concluded that the first phase of the project alone would exceed all non-residential construction that occurred in Quechee between 1998 and 2005 by 71 percent.

The commission said it was especially concerned over increased congestion at the intersections of Route 4 and Route 5, and Route 4 and Quechee Main Street, and said that the project would cause longer traffic delays and perhaps prompt drivers to “take chances to pull out between gaps in traffic that are not safe.”

The ruling comes as state officials, including Gov. Peter Shumlin, have focused their attention on the safety of the state highway following several fatal crashes this spring. A traffic analysis showed Quechee Highlands could draw 215 cars an hour onto Route 4 during the morning rush hour.

Act 250 is Vermont’s most important land use law, and allows regulators to reject proposed construction if it adversely affects the environment, municipal services, historic sites or other concerns. It requires developers to win permission of the District Environmental Commission before proceeding with their projects.

Though it won the backing of the Hartford Planning Commission, which said the project was in accord with the town plan, Quechee Highlands has been opposed by the Two Rivers-Ottauquechee Regional Commission, which represents 30 towns and crafts a development policy for the region.

Two-Rivers’ regional plan directs major new developments toward areas that have been already developed — in Hartford, Quechee Village or White River Junction — and discourages significant developments at interstate exchanges.

Generally, state law holds that, when town plans conflict with regional plans, regional plans take precedence.

The commission yesterday affirmed that hierarchy, cheering Two-Rivers Executive Director Peter Gregory, who said the impact of Quechee Highlands will be felt beyond Hartford.

“We’re pleased that the District Commission used our regional plan,” Gregory said. “They have been consistent in their rulings (urging) using the plans, and the plan is being used as intended.”

Though it denied the permit, the commission found that the project met its criteria for protecting against air pollution and preserving scenic spaces and natural areas.